CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

Chapter 11 – Sale of Goods on

Approval or Return Basis
Introduction
When goods are sold to customers giving them the option to return the goods within a specified time (in
case they don’t like them), such sale is known as sale of goods on approval or return basis. It is prevalent
on online sales these days, where Amazon, Flipkart etc. give the option to the customers to return the
goods within a specified time.

Accounting Records
There are three ways in which accounting records are maintained of sale of goods on approval or return
basis:

1. When the business sends goods casually on sale or return basis

2. When the business sends goods frequently on sale or return basis
3. When the business sends goods numerously on sale or return basis

Case 1 – When the Business Sends Goods Casually on Sale or Return Basis
When the business sends goods casually on sale or return basis, it is treated as an ordinary sale. When
the customers give their acceptance regarding the goods, no additional entry is required to be passed. If
the goods are returned within the specified time, a reverse entry is passed, debiting either Sales A/c or
Sales Return A/c and crediting the Customer’s A/c. If at the year end, some goods are still lying with the
customers pending approval, two entries are made – first, the reverse of sales entry to cancel out the
sales, and second, to record the closing stock.

Journal Entries are:

1. When goods are sent on sale or return basis:

Trade Receivables/Customer’s A/c Dr. Invoice Price
To Sales A/c
2. When goods are rejected or returned within the specified time:
Sales/Return Inwards A/c Dr. Invoice Price
To Customers/Trade Receivables A/c
3. When goods are accepted at invoice price:
No Entry
4. When goods are accepted at a higher price than invoice price:
Trade Receivables/Customers A/c Dr.
To Sales A/c Difference in Price
5. When goods are accepted at a lower price than the invoice price:
Sales A/c Dr.
To Trade Receivables/Customers A/c Difference in Price
6. At the year-end:
a. When goods are lying with customers and specified time limit has not yet expired:
Sales A/c Dr. Invoice Price
To Trade Receivables/Customer’s A/c

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 CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

b. These goods should be considered as inventories with customers and in addition to the
above, the following adjustment entry is to be passed:
Inventories with Customers on Sale or Return A/c Dr.
To Trading A/c Lower of Cost or NRV

Note – No entry is passed for goods returned by customers on a subsequent date.

Question 1

Mr. Badhri sends goods to his customers on Sale or Return. The following transactions took place during
the month of December 2017.

December 2nd - Sent goods to customers on sale or return basis at cost plus 25% - ₹80,000

December 10th - Goods returned by customers ₹35,000

December 17th - Received letters from customers for approval ₹35,000

December 23rd - Goods with customers awaiting approval ₹15,000

Mr. Badhri records sale or return transactions as ordinary sales. You are required to pass the necessary
Journal Entries in the books of Mr. Badhri assuming that the accounting year closes on 31 st Dec. 2017.

(May, 2018 – 5 Marks; ICAI Study Material (Similar))

Question 2

S. Ltd. sends out its goods to dealers on Sale or Return basis. All such transactions are, however, treated
as actual sales and are passed through the Day Book. Just before the end of the accounting year on
31.03.2016, 200 such goods have been sent to a dealer at ₹250 each (cost ₹200 each) on sale or return
basis and debited to his account. Of these goods, on 31.03.2016, 50 were returned and 70 were sold
while for the other goods, date of return has not yet expired.

Pass necessary adjustment entries on 31.03.2016.

(ICAI Study Material)

Solution

In the books of S. Ltd.

Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
2016
Mar. 31 Return Inwards A/c (₹250 × 50) Dr. 12,500
To Trade Receivables A/c 12,500
(Being the adjustment for 50 units of goods returned by
customers to whom goods were sent on sale or return
basis)
Mar. 31 Sales A/c (₹250 × 80) (Note 1) Dr. 20,000
To Trade Receivables A/c 20,000
(Being the cancellation of original entry for sale in
respect of 80 units of goods not yet returned or
approved by customers)
Mar. 31 Inventories with Customers on Sale or Return A/c Dr. 16,000

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 CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

To Trading A/c 16,000

(Being the cost of goods sent to customers on approval
or return basis not yet approved, adjusted)
Note 1 – Quantity of Goods lying with dealers as on 31-12-2016 = 200 – 50 – 70 = 80.

Question 3

Caly Company sends out its gas containers to dealers on Sale or Return basis. All such transactions are,
however, treated as actual sales and are passed through the Day Book. Just before the end of the
financial year, 100 gas containers, which cost them ₹900 each have been sent to the dealer on ‘sale or
return basis’ and have been debited to his account at ₹1,200 each. Out of this only 20 gas containers are
sold at ₹1,500 each.

You are required to pass necessary adjustment entries for the purpose of Profit and Loss Account and
Balance Sheet.

(ICAI Study Material)

Solution

In the books of Caly Company

Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
Trade Receivables A/c Dr. 6,000
To Sales A/c 6,000
(Being the adjustment for excess price of 20 gas containers
@ 300 each)
Sales A/c Dr. 96,000
To Trade Receivables A/c 96,000
(Being the cancellation of original entry for sale in respect of
80 gas containers @ ₹1,200 each)
Inventories with Customers on Sale or Return A/c Dr. 72,000
To Trading A/c 72,000
(Being the adjustment for cost of 80 gas containers lying
with customers awaiting approval)

Question 4

E Ltd. sends out its accounting machines costing ₹200 each to their customers on Sales or Return basis.
All such transactions are, however, treated like actual sales and are passed through the Day Book. Just
before the end of the financial year, i.e., on March 24, 2016, 300 such accounting machines were sent
out at an invoice price of ₹280 each, out of which only 90 accounting machines are accepted by the
customers ₹250 each and as to the rest no report is forthcoming.

Show the Journal Entries in the books of the company for the purpose of preparing Final Accounts for the
year ended March 31, 2016.

(ICAI Study Material)

Solution

In the books of E Ltd.

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 CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
2016
Mar. 31 Sales A/c (₹30 × 90) Dr. 2,700
To Trade Receivables A/c 2,700
(Being the adjustment for reduction in the selling price of
90 accounting machines @ ₹30 each)
Mar. 31 Sales A/c (₹280 × 210) Dr. 58,800
To Trade Receivables A/c 58,800
(Being the cancellation of original entry for sale in respect
of 210 accounting machines sent to customers not yet
returned or approved)
Inventories with Customers on Sale or Return A/c Dr. 42,000
To Trading A/c 42,000
(Being the cost of 210 accounting machines @ ₹200 each
adjusted against Trading Account)

Question 5

On 31st December, 2018, goods sold at a sale price of ₹3,000 were lying with customer, Ritu to whom
these goods were sold on ‘sale or return basis’ and were recorded as actual sales. Since no consent has
been received from Ritu, you are required to pass adjustment entries presuming goods were sent on
approval at a profit of cost plus 20%. Present market price is 10% less than the cost price.

(RTP May, 2019; ICAI Study Material)

Solution

Journal Entries
Date Particulars L.F. Dr. (₹) Cr. (₹)
2018
Dec. 31 Sales A/c Dr. 3,000
To Ritu's A/c 3,000
(Being cancellation of entry for sale of goods, not yet approved)
Inventories with Customers A/c (Working Note) Dr. 2,250
To Trading A/c 2,250
(Being inventories with customers recorded at market price)

Working Note – Calculation of Value of Stock lying with Customers

Particulars ₹
I. Cost of Goods
Sale Price of Goods Sent on Approval 3,000
Less: Profit (₹3,000 × 20/120) 500 2,500

II. Market Price of Goods

Cost of Goods (as calculated above) 2,500
Less: Reduction of 10% (10% of ₹2,500) 250 2,250

Value of Stock (Lower of I or II) 2,250

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 CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

Question 6

Mr. Ganesh sends out goods on approval to few customers and includes the same in the Sales Account.
On 31.03.2018, the Trade Receivables balance stood at ₹75,000 which included ₹6,500 goods sent on
approval against which no intimation was received during the year. These goods were sent out at 30%
over and above cost price and were sent to-

Mr. Adhitya ₹3,900 and Mr. Bakkiram ₹2,600.

Mr. Adhitya sent intimation of acceptance on 25 th April, 2018 and Mr. Bakkiram returned the goods on
15th April, 2018.

Make the adjustment entries and show how these items will appear in the Balance Sheet as on 31st
March, 2018. Show also the entries to be made during April, 2018. Value of Closing Inventories as on 31 st
March, 2018 was ₹50,000.

(November, 2018 – 5 Marks; ICAI Study Material (Similar))

Case 2 – When the Business Sends Goods Frequently on Sale or Return Basis
In this case, goods sent on approval basis are not considered as sales unless confirmation is received
from the customers. Records of goods sent is maintained in a specially ruled Sale or Return Journal/Day
Book:

Goods Sent on Approval Goods Returned Goods Approved Balance

1 2 3 4 5 6 7 8 9 10 11 12 13
Date Particulars Fol. Amt. Date Particulars Fol. Amt. Date Particulars Fol. Amt. Amt.

The recording of the transactions is done in the following way:

1. When goods are sold on approval – The details in respect of such goods are entered in the first
four columns of the book only as a memorandum record.
2. When goods are approved – The details are entered in columns 9 to 12 of the book. The
personal accounts are debited as and when goods are approved. The sales account is credited
with the total amount at the end of the month.
3. When goods are returned – The details are recorded in the columns 5 to 8. However, no entry is
made for such return of goods since no entry was made at the time when such goods were sent
for approval.
4. Balance of stock – The balance of the goods lying with the customers is ascertained and
recorded in the 13th column. At the end of the accounting year, Stock with Customers A/c is
debited and Trading A/c is credited with the value of such goods.

Case 3 – When the Business Sends Goods Numerously on Sale or Return Basis
In this case, the following books of accounts are kept:

1. Sale or Return Day Book – This book is like the sales book. As soon as the goods are sold on
“sale or return” basis, they are recorded in this book.

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 CHAPTER 11 – SALE OF GOODS ON APPROVAL OR RETURN BASIS

2. Sold and Returned Day Book – This book records the goods retained and goods returned by
customers out of the goods sent on sale or return. It has separate columns for “goods sold” and
“goods returned”.
3. Sale or Return Ledger – This book contains the following:
a. Separate accounts of each of the customers to whom goods have been sent on sale or
return basis, and
b. Sale or Return Account for total goods sent on sale or return.
4. Main Ledger – This is the real ledger of the business. It contains all real, nominal and personal
accounts.

Question 7

X supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of Dispatch Party’s Name Amount (₹) Remarks

10-12-2017 M/s ABC Co. 10,000 No information till 31-12-2017
12-12-2017 M/s DEF Co. 15,000 Returned on 16-12-2017
15-12-2017 M/s GHI Co. 12,000 Goods worth ₹2,000 returned on 20-12-2017
20-12-2017 M/s DEF Co. 16,000 Goods retained on 24-12-2017
25-12-2017 M/s ABC Co. 11,000 Goods retained on 28-12-2017
30-12-2017 M/s GHI Co. 13,000 No information till 31-12-2017
Goods are to be returned within 15 days from the dispatch, failing which it will be treated as sales. The
books of ‘X’ are closed on the 31st December, 2017.

Prepare the following account in the books of ‘X’:

1. Goods on “sales or return, sold and returned day books”.

2. Goods on sales or return total account.

(RTP May, 2018; ICAI Study Material)

Question 8

A firm sends goods on sale or return basis. Customers having the choice of returning the goods within a
month. During May 2016, the following are the details of goods sent:

Date (May) 2 8 12 18 20 27
Customers P B Q D E R
Value (₹) 15,000 20,000 28,000 3,000 1,000 26,000
Within the stipulated time, P and Q returned the goods and B, D, and E signified that they have accepted
the goods.

Show in the books of the firm, the Sale or Return Account and Customer- P for Sale or Return Account on
15th June, 2016.

(ICAI Study Material)

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